How can we reduce inequality?

Paul Krugman needs no introduction. Probably the most famous economist alive, he’s also a noted policy advisor, opinion columnist and blogger for The New York Times. His cutting-edge research revolutionized the way we think about international trade and industry localities. And his work initially won him the John Bates Clark Medal, awarded to a US economist under the age of 40. Winning the Nobel Prize became only a matter of time.

Paul R. Krugman

Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2008

At a glance

Born: 1953, New York, USA

Field: International and regional economics

Prize-winning work: Analysis of trade patterns and location of economic activity

Music lover: He might be the only man without a top-knot at Brooklyn gigs

What makes him uneasy: Being recognized on the street

A living legend with energy to spare

Early in the morning, Krugman appears in the corridor of the CUNY Graduate Center. His gait is firm and energetic, his expression focused - without a trace of frequent traveler’s fatigue. In his soft voice, shyly but directly, Krugman briefly runs us through his schedule: he’s just arrived from an advisory overseas trip and is preparing for a conference on inequality the next day.

A critical voice that reaches millions

In his mildly sarcastic New York tone, Krugman responds: "Everybody who does international economics, and tries to do both analysis and policies has to be not-quite-human in some dimension." The economist walks us down memory lane, to his graduate school days - revealing that his adviser and mentor, economist Rudi Dornbusch, could make do with just three to four hours sleep a night. Krugman admits he needs his shuteye, but he has his own strategy for keeping up: "I’m a very, very fast, organized writer."

Krugman gained huge popularity among millions of keen readers from his critical New York Times column, which won him the moniker "The voice of the left". In his minimalist writing style, Krugman explains complex economic concepts, making them resonate with a wide array of readers who don’t necessarily have economics degrees. His words, gracing "the best journalistic real estate in the world", reach a massive international readership.

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The ruling elites under fire

Krugman’s opinion pieces take on the ruling elites, the 1% and the climate-change deniers. He challenges viewpoints frequently found in academic and journalistic writing.

Often, conventional wisdom is not actually supported by the evidence. And if you ask where conventional wisdom comes from, it very heavily tends to reflect the preferences and interests of the elite.

The Nobel Laureate uses the divergent preferences of the elite, in contrast with those of the masses to illustrate this point. "The general public would like to see welfare and social insurance programs strengthened, not cut back. The elite would like to see them cut back. Then you ask, where is the conventional wisdom? It’s that the deficit is a terrible problem and we must cut back on entitlement programs." He says people come to understand a status quo, for example "austerity is the only way", not because it’s what voters want, but because it’s the interest of the elite.

Is there a one-size-fits-all policy? 

Austerity versus a growing deficit is a divisive topic among economists, Krugman illustrates with an example: "France has been pretty diligent about trying to reduce its budget deficit, almost too much so. But France being where it is, having the policy that it does, did it by trying to raise taxes on the wealthy, rather than cutting social programs. And there are a lot of people in the European commission saying: Oh no, that’s not right, that’s not what we call austerity. Which gave the game away. If you’re saying: It’s only austerity if you make poor people suffer, that’s showing what it’s really all about."

What made Paul Krugman?

Krugman considers his career a lucky accident of being in the right place at the right time. A humble view considering he’s done significant work in all the right times and places. Take for instance his work for the US government.

People are always shocked when they find out I worked in the Reagan administration.

Krugman smiles. He was 29 when he was appointed senior international economist alongside Harvard University President Emeritus Larry Summers, then a senior domestic economist. As a Democrat in the Republican administration, the young economist saw the job as an opportunity to gain a deeper understanding of the way things work in the economy and the government.

A new theory on international trade

As we continue the conversation about his award-winning research, the 2008 Laureate’s portrait begins to take shape. Take his renowned legacy of robust economic modeling from MIT, where he earned a PhD in 1977 and became a professor, along with his talent for clear writing with a direct, New York style presentation: this is Krugman. He feels that this melting pot of longstanding immigrant tradition in New York has shaped his method of approaching economics.

Krugman argues that his work is a unique blend of substance and style. He chose to develop a theory based on the insights of a single case, rather than broader generalizations. He used the simplest model possible to grasp the essence of the theory. As for substance, his focus on the idea of increasing returns in international trade, draws from the works of economics forefathers Adam Smith and David Ricardo.

"When I think about the state of international trade theory before about 1980, there’s an old joke about a drunk who dropped his keys and searches for them under a lamppost. Someone passes and asks: did you drop your keys here? And he says: No, I dropped them in the alley, but I can’t see there, so I’m looking here, where there’s enough light." Krugman smirks. "The older theories assumed that there was perfect competition," he says. "That there were no advantages to large scale production, and the reason to assume this was that we knew how to model that, we knew how to do the analysis: it was simple economics." Krugman points out that the trouble was that specialized large scale production didn’t match the model. It wasn’t the right tool.

Nearly everyone avoided dealing with the complications of modeling increasing returns, which included the possibility of multiple equilibria, as well as transforming a static model into a dynamic one. The economist talks of his groundbreaking work rather matter-of-factly: "The work that I got the Prize for was very largely about finding an intersection between newly available analytical tools and the corresponding real world issues. I didn’t start with an issue and then try to find a way to analyze it. I started mostly with a tool and discovered the issue to which it applies."

Dealing with a real-world issue: inequality

Krugman started working on the problem of inequality as a public intellectual, rather than approaching it from a purely academic position. "There are things that we know we can do and there are things that we think we can do. And we should be doing all of them. Redistribution, taxes and transfers, guarantee of basic income in some form for the less fortunate, paid for by taxes on the most fortunate. We can do that. But we know that there’s a wide range of how much is done, and there’s no evidence that countries that do more pay any real price."

While there’s no ready-made cure for all the world’s problems, Krugman believes many of the present issues facing the globe can be addressed with relevant economic tools and solutions. What’s lacking, however, is the political will to solve them. This is precisely how Krugman sees the biggest challenge: climate change. "That’s so scary," he says, bewildered.

Why do we even talk about anything other than climate change? The problem is, we have a combination of denial and the problem of which country bears the burden. That dominates everything else.

Be it for an academic audience or for the general public, Krugman always finds a way to tell a story. Early in his childhood and adolescence he cultivated a passion for history, narratives, and sci-fi novels. From this passion emerged a desire to tell stories about people, the way they interact with one another, and what results from it.

It’s not surprising that Krugman’s writing about economics for the people and his view of economics resonate with each other.

Economics is a social science, about what people do and how it turns out. And that means that you’re telling a story, a narrative about people, even if you’re doing it in a very stylized way.

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What does Krugman's work mean for us?

"Central to his style both as a writer and a serious economist is building small, simple models that shine a light on the essence of a situation."

Tim Harford
Financial Times columnist and author of
The Undercover Economist

"For modern investors, the interesting thing about Krugman’s work is his acknowledgement that the trade patterns and industrial clustering he described may be disappearing."

Paul Donovan
Global Chief Economist
UBS Wealth Management

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